IPE Views: CMU gets a strategy plan

Even the most reform-resistant EU member states will face pressure to comply to the European Commission’s Capital Markets Union plan, writes Jeremy Woolfe

If a leaked draft copy of the European Commission’s battle plan aimed at creating an effective Capital Markets Union (CMU) is anything to go by, even the most reform-resistant EU member states will face great pressure to comply.

The confidential document, from financial stability commissioner Jonathan Hill’s department, reads like a strategy plan from a corporation rather than from an institution.

The contrast with documents relative to, say, a typical, single piece of legislation from the Commission is striking.

In fact, its eventual “Elements of a Capital Market Union Action Plan” may well have the flavour of a military operations order. It covers a host of eventualities. Its scope is broad.

The official Action Plan is due to be discussed by Hill in Brussels on 1 October and presented to a European Parliament delegates meeting in plenary session on 7 October.

The plan, from Hill’s DG for finance, follows February’s “green” policy paper “Building a Capital Markets Union”.

On pensions, that text emphasised that growing occupational and private pension provision in Europe could result in an increased flow of funds.

The flows could be into a more diverse range of investment needs through capital market instruments and, according to the policy paper, facilitate a move towards market-based financing.

Particularly focusing on occupational pensions, the new draft action plan – which evidently takes in input from all relevant sectors – refers to the pan-European 29th Regime project, which would co-exist alongside nationally based systems. 

The plan writes that the merit of this project will be judged from a feasibility assessment to come from the European Insurance and Occupational Pensions Authority (EIOPA). The authority’s advice is due early next year.

Also, the Commission is described as planning work to enable a launch of a “blue-print for the creation of a pan-European market for private pension (third-pillar) products”.

One item of emphasis is on “building blocks” to upgrade securitisation rules to boost investments into the SME sector. This was stressed by commissioner Hill, speaking at a recent meeting in Brussels of the European Banking Federation.

The draft strategy document states that the lack of ability by potential investors to “pre-screen” companies may be a deterrent to investment in SMEs. Dating from before the summer break, it notes that work is taking place.

It refers to, for instance, “enhancing the advisory capacity across all member states to assist SMEs, which could benefit from alternative [that is, non-bank] sources of finance”.

Among other references is one to problems with the existing Prospectus Directive. Clearly, the Commission wants to get its teeth into it. It indicates revisions as a “short-term” priority, later in the year.

Currently, when larger companies raise funds via capital markets, it can cost them “excessive” fees to produce “voluminous prospectus disclosures”. The outlay can be up to 15% capital raised for issuances of less than €6m, and up to 5% for amounts of more than €50m.

Other facets in the plan include attention to the Solvency II regime, the Capital Requirement Regulation, the Common Consolidated Corporate Tax Base (CCCTB), national rules restricting cross-border capital and insolvency rules.

Under Solvency II, the plan advocates revisions to the calibrations to accommodate “the new definition of infrastructure and provide a regulatory treatment to appropriately incentivise infrastructure investments”.

As for legal barriers to cross-border investment, the plan points a finger at national rules. Here, the Commission proposes a direct approach with member states, to remove the barriers. It also notes that it is “seeking to give stronger effect to Treaty provisions on the free movement of capital”.

On insolvency, it regrets that only a handful of EU member states has followed a 2014 recommendation for a new approach. Hence, the Commission has begun preparatory work to put in place “a minimum harmonisation”.

The final action plan is likely to state that each major initiative should be accompanied by an implementation accessory. This would define the intermediate steps, inputs and resources needed to support delivery. 

Undoubtedly, the Commission is giving its “top priority” to having a fully functioning CMU in place by 2019.

The hope has to be that member state governments will be persuaded to act appropriately. That would mean working together on reforms aimed at creating economic progress – that is, towards “the European dream”.